Us-China Economic and Security Review Commission

CHINA AND THE FUTURE OF GLOBALIZATION HEARINGS BEFORE THE U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION ONE HUNDRED NINTH CONGRESS FIRST SESSION MAY 19 AND 20, 2005 Printed for the use of the U.S.-China Economic and Security Review Commission Available via the World Wide Web: http://www.uscc.gov U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2005 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate Aug 04 2004 09:11 Sep 29, 2005 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 6602 I:\USCC\051905\206679.XXX APPS10 PsN: 206679 I:\uscc\USChina.eps U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION Hon. C. RICHARD D’AMATO, Chairman ROGER W. ROBINSON, Jr., Vice Chairman CAROLYN BARTHOLOMEW, Commissioner Hon. PATRICK A. MULLOY, Commissioner GEORGE BECKER, Commissioner Hon. WILLIAM A. REINSCH, Commissioner STEPHEN D. BRYEN, Commissioner Hon. FRED D. THOMPSON, Commissioner JUNE TEUFEL DREYER, Commissioner MICHAEL R. WESSEL, Commissioner THOMAS DONNELLY, Commissioner LARRY M. WORTZEL, Commissioner T. SCOTT BUNTON, Executive Director KATHLEEN J. MICHELS, Associate Director The Commission was created in October 2000 by the Floyd D. Spence Na- tional Defense Authorization Act for 2001 sec. 1238, Public Law 106– 398, 114 STAT. 1654A–334 (2000) (codified at 22 U.S.C. sec. 7002 (2001)), as amended, and the ‘‘Consolidated Appropriations Resolution of 2003,’’ Public Law 108–7, dated February 20, 2003. Public Law 108–7 changed the Commission’s title to U.S.-China Economic and Security Review Com- mission. The Commission’s full charter is available via the World Wide Web: http:// www.uscc.gov. The Commission’s Statutory Mandate begins on page 305. (II) VerDate Aug 04 2004 09:11 Sep 29, 2005 Jkt 000000 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 I:\USCC\051905\206679.XXX APPS10 PsN: 206679 U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION SEPTEMBER 22, 2005 The Honorable TED STEVENS, President Pro Tempore of the U.S. Senate, Washington, D.C. 20510 The Honorable J. DENNIS HASTERT, Speaker of the House of Representatives, Washington, D.C. 20515 DEAR SENATOR STEVENS AND SPEAKER HASTERT: On behalf of the U.S.-China Economic and Security Review Com- mission, we are pleased to transmit the record of our hearing in New York City at the Council on Foreign Relations on May 19 and 20, 2005. The hearing on ‘‘China and the Future of Globalization’’ gave the Commission insights into China’s role in global economic developments and how these ‘‘globalization’’ trends affect the Amer- ican economy. A copy of the hearing record is also available on the Commission’s website at www.uscc.gov. U.S.-China economic relations have become central to the devel- opment of global economic trends. As trade and investment between the two nations has expanded in importance and scope, the impact of this relationship on the U.S. economy—and the global economy—has grown to enormous proportions. In its 2004 Report to Congress, the Commission noted that ‘‘the U.S.-China economic relationship is of such large dimensions that the future trends of globalization will be influenced to a substantial degree by how the United States manages its economic relations with China’’ and that ‘‘[i]t is reasonable to believe that U.S.-China economic relations will help shape the rules of the road for broader global trade relations.’’ Understanding the assumptions and governing theories and models underlying globalization is essential because they shape the way policymakers view the trends and implications of global economic developments. These theories and models are deeply rooted and have driven U.S. economic policies for decades. For this reason the Commission felt it important to take stock of the underlying theories and models of globalization and China’s role in these developments. The New York hearing featured testimony from prominent econo- mists, academicians, and business leaders. The topics discussed in- cluded the economic underpinnings of globalization, the impacts of globalization on national economies, China’s role in the develop- ment of globalization, the interrelationship between globalization and the U.S. trade deficit, corporate globalization strategies, the rise of mass retailers and their influence on production location decisions, and the role of tax policy in driving trade and investment flows. Among the key observations made by participants during this session were the following: iii VerDate Aug 04 2004 09:11 Sep 29, 2005 Jkt 000000 PO 00000 Frm 00003 Fmt 8486 Sfmt 6602 I:\USCC\051905\206679.XXX APPS10 PsN: 206679 • While many U.S. firms have addressed their global competitiveness challenges through outsourcing and ‘‘off-shoring,’’ 1 these individual corporate decisions do not address, and in some cases may conflict with, efforts to maintain productive ca- pacities in industries important to U.S. economic leadership and viability. This distinction between private and national interests is particularly pertinent with regard to the U.S. economic relationship with China. • In today’s global economy, factors of production, including cap- ital and technology, flow freely across national borders, raising questions about the continuing usefulness of the traditional theory of comparative advantage, which assumes non-mobile factors of production, for understanding patterns of trade and production. • In assessing the relevance of comparative advantage analysis to U.S.-China economic relations, it is important to recognize that a significant aspect of China’s competitive advantage stems from a system where workers are often denied fundamental workers rights. Addressing this requires the inclusion of strong workers rights provisions in trade agreements. • The opening of the Chinese, Indian, and former Soviet bloc economies has led to more than a doubling of the global work force and likely will put downward pressure on U.S. wages, at increasingly higher levels of the wage scale, for decades. • China and other East Asian economies are pursuing export-led, mercantilist growth strategies that undermine the foundations of an open and balanced international trading system. • While there is not a complete consensus regarding all the underlying causes of the U.S. trade deficit, the current trends are unsustainable and demand immediate attention, including addressing U.S. federal budget deficits and misaligned exchange rates. • The rise of ‘‘big box’’ mass retailers has led to a shift of market power from manufacturers to retailers with profound implications for the organization of production. China has become the key source from which such retailers obtain manufactured con- sumer products and this has been a key driver of China’s economic growth. • The current structure of the U.S. international tax system is both inefficiently complex and generally favorable to offshore, as opposed to domestic, investment. U.S. Economic Competitiveness Ambassador Richard Haass, President of the Council on Foreign Relations, opened the hearing with perceptive observations on U.S. economic competitiveness. He noted that the arrows are pointing in the wrong direction with regard to long-term trends in U.S. competitiveness and that competitiveness is not something that can be established ‘‘overnight,’’ but instead must be developed and nur- tured over the long-term. 1 ‘‘Off-shoring’’ encompasses both the outsourcing of work by a U.S. firm to a foreign firm pro- ducing abroad and a U.S. firm’s relocation of production to a facility it owns and operates over- seas. iv VerDate Aug 04 2004 09:11 Sep 29, 2005 Jkt 000000 PO 00000 Frm 00004 Fmt 8486 Sfmt 6602 I:\USCC\051905\206679.XXX APPS10 PsN: 206679 Dr. Ralph Gomory, President of the Alfred P. Sloan Foundation, highlighted the differing competitiveness challenges faced by individual companies and the nation as a whole. He told the Commis- sion that ‘‘[t]here is and can be fundamental conflict between the goals of the company and the goals of the country’’ since U.S. companies are required to make profits rather than consider the national effect of their decisions about where to produce goods or services. This distinction between ‘‘national’’ and ‘‘private’’ competitiveness raises profound public policy questions concerning the distinction between public and private interests. These questions are especially germane to our economic and security relationship with China, where the market may promote private actions that are at odds with the national interest. Such concerns were also voiced by Mr. Ron Blackwell, Chief Economist of the AFL-CIO. Mr. Blackwell maintained that our nation faces its most serious competitive challenge in modern history. Like Ambassador Haass, he noted that the issue is not receiving adequate public debate and policy attention. With regard to the conflict between ‘‘national’’ and ‘‘private’’ competitiveness, Mr. Blackwell noted that many companies have solved or are attempt- ing to solve their private competitiveness challenges through off- shoring. But this leaves unresolved the national competitiveness problem regarding how the United States will pay its way in the global economy in the future and continue to create a broad base of well-paying jobs for American workers. The United States’ lack of attention to strategic competitiveness concerns was concretely brought home to the Commission by testimony from Mr. William Jones, Chairman of the Cummins-Allison Corporation. Cummins-Allison is a producer of specialty currency printing and verification equipment. Whereas other countries view protection of their currencies as a national and economic security concern warranting a domestic production champion, the United States has no such policy. The result has been the creation of an uneven playing field in which foreign competitors are significantly advantaged by the support of their governments.

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